Why sustainable investors have the upper hand

Written by Rebecca O'Connor on 21st Jun 2022

It’s a hard time to be an investor. If you have a pension or ISA, watching the returns since January go negative, as global stock markets (not to mention crypto) have tanked, has been the harshest of experiences.

Particularly for beginner investors and arguably even more so for those who made sustainable choices, who may now be questioning whether it was the greener nature of their investments that has been behind their demise and wondering whether they would have been better off taking a hard-nosed, profit first approach to their own money after all.

It isn’t and they wouldn’t. The main reason many sustainable funds have performed poorly is that generally, they have a higher proportion of US technology stocks in them and these have fared badly in the face of rising inflation. That’s because much of their value is based on future earnings, which are quickly eroded when prices now are rising rapidly.

There are other reasons performance has suffered – but they have little to do with the sustainable badge (the ‘theme’ of the investment) and everything to do with the asset class, geography, company size and type of investment.

If you don’t need the money now, painful as it may be, it’s best to leave it invested.

If the recent rout has all got too much and you are regretting ever dipping your toes in the stock market – or even taking an interest in where your pension was going – you may be tempted to sell and revert to the safety of a cash savings account. Remember that interest rates relative to inflation are still poor and that if you sell your investments now, you crystallise or make real any losses.

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So if you don’t need the money now, painful as it may be, it’s best to leave it invested. Some would even say that now, with values so low, could be an opportunity to buy more units or shares of whatever you are invested in, if you feel the only way is up and performance is unlikely to get much worse. Timing the bottom of the market can be scary too, though. The last thing you want to do is buy at -25 per cent on January prices in the belief things can only get better and watch the value fall further to -50 per cent.

Here’s where I actually think sustainable investors are in a relatively good position, compared with others who may ignore the environmental and social merits of investments and focus only on the bottom line.

Whereas investors not motivated by wider sustainability goals are simply down because values are down, long term sustainable investors may still be benefiting from ‘emotional return’ – the positive feeling of helping to fund renewable energy or social housing projects for instance, may help some to overcome the financial losses within their portfolio.

That belief in being on the right side of history will be a comfort, too. If you are absolutely convinced that renewable energy has to and will take over from fossil fuels in the future, then you will be thinking that any declines in value now from the green stuff is absolutely nothing compared to what fossil fuels companies will suffer in the coming years – and that the long term trend for net zero-aligned companies is upwards.

The question is more: how long will you have to wait? You may well be right that renewable technologies will win in the end, but be aware that the energy transition, though it needs to happen quickly, is likely to take years and there will be many twists and turns along the way.

If you need some ballast to your beliefs and commitment to back them with your own money, my book, The ESG Investing Handbook, is published on June 28 and available to pre-order as a free, downloadable e-book, from Harriman House.

In the face of harsh stock market realities, it might just give you the insight you need to ride out the tough times, for the promise of the better future ahead.

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